Sunday
May 20, 2018

We Need Growth, Not Inflation

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We Need Growth, Not Inflation

However, with oil prices continuing to rise, the Federal Reserve will have little alternative but to tighten its monetary policy, raising its target interest rate before the year's end.

With oil prices continuing to rise, the Federal Reserve will have little alternative but to tighten its monetary policy, raising its target interest rate before the year’s end.

We’ve been hearing a lot about inflation lately, especially with the sharp rises in gas and food prices.

Although inflation isn’t entirely bad from a home owner’s perspective—it would help stop the drop in home values for one thing, at least at a nominal level—on the whole, inflation is a specter we want to avoid. It erodes confidence and productivity in the economy and distorts the allocation of capital.

Of course, inflation is particularly bad from a buyer’s point of view, because the Federal Reserve’s main weapon against it is higher interest rates. Who can forget the double-digit mortgage rates of the late 1970s and early 1980s?

The good news is that inflation, while creeping up, remains under control. The Consumer Price Index is rising at a rate of about 4 percent, well above the Federal Reserve’s target of about 2.5 percent. But given our weak economy, it’s reasonable to expect core inflation (the CPI without volatile food or energy prices) to remain moderate.

However, with oil prices continuing to rise, the Federal Reserve will have little alternative but to tighten its monetary policy, raising its target interest rate before the year’s end.

This short-term medicine should not be viewed as a negative, because the alternative is much higher inflation, which would lead lenders to raise their rates by adding a premium to compensate for a loss in purchasing power. Keeping inflation low, even if it means raising short-term rates, is in the long-term interest of the housing market. These inflationary pressures make it imperative that Congress step in with a fiscal stimulus. The home buyer tax credit, supported in both the House and Senate, will spur recovery through growth rather than inflation.

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